The recent columns on the ethical and structural challenges facing biotech struck a chord with many readers. My email inbox was inundated with comments and queries from folks at small and large biotech and big pharma firms, entrepreneurs, bankers, venture capitalists, academics, economic development people and a range of groups that provide services to the sector.
Several themes have emerged from these "letters to the editor," and we will continue to explore these ideas and the groups pursuing them in future columns.
From The Investing Side
Folks in biotech confirmed that the venture funding situation is ghastly unless you are in Phase II trials - in which case, you probably don't need the excessively expensive money offered by the VCs. Once you get into the clinic, the institutional investors crush your funding dreams. What's a girl to do?
Comments from the investment side confirmed that many partners can't invest in early stage opportunities - these deals would not fulfill return-on-investment obligations to the fund and the limited partners. Ironically, the very success of earlier funds led to excessive amounts of cash in new funds that need to be put to work, and that requires deals in which you can invest 10-fold or more over the amounts that can be supported by the valuations of early stage deals.
Everyone expressed deep concern about how to sustain the flow of great science if investors walk away from early deals. There was suggestion that some investors see that as a great opportunity, and are creating small funds that would focus on the early projects.
One writer, with years of experience in venture capital and as a company entrepreneur, described the project-based approach as an evolution toward something that looks like Hollywood. In the movie industry, people don't work for a single company, but rather join projects at points in which their particular skills are required - then move to another project. The end result provides distributed returns, and fixed costs are minimized (well, at least some of them are!).
He is looking for a new breed of chimeric VC, with financial, operating and technical experience to manage multiple projects in a portfolio, some of which would be out-licensed rather than going into companies. An intriguing version of that is Bioaccelerate Holdings Ltd., which I plan to report on later.
Another experienced entrepreneur suggested that the requirement for excessive funding and the high early failure rate of companies is driven by the domination of boards by venture investors, often lacking sufficient operating skills and all with an agenda driven by liquidation rather than sustainable company growth. He suggested that the leadership model is broken, not just the financing model. Can you build better boards for early companies?
The Academic World
Academic groups from the U.S. and the Pacific Rim have emailed and called me to talk about the challenges they face finding ways to move promising "projects" forward through the required proof-of-principal work. Until that dataset is complete, it is essentially non-fundable with classic venture backing. To date, government support has not been targeted at that problem in an effective manner.
Several campuses have tried to create a hybrid academic/corporate environment for vetting out projects, along with access to early venture funding. Some of those are grappling with the reality that not every great project deserves its own company - it might simply be a great out-licensing opportunity.
There are hints of success, but huge challenges remain: how to fulfill the senior investigators' need for "psychic dollars" that normally come from publishing in prestigious journals or from having "their" own company; how to avoid campus politics while making commercial decisions; how to recruit and pay folks with industry experience; and, most importantly, how to fund such an environment to avoid the conflict-of-interest issues and keep the intellectual property trail clean.
Economic Development, Company Structure
A long-time entrepreneur who also survived running a university venture fund pointed out that economic development policies are affecting biotech strongly. The unsavory changes in SBIR and ATP grant availability make VC investment a liability, and lack of a biotech development policy in California - home of the industry (okay, I am prejudiced) - are making it harder to convince pension funds that venture investments support regional economic development.
Her conclusions: show clinical efficacy with $15 million or less, then divest to a corporate partner; use non-equity funding as much as possible, including partnering with academic labs and outsource development; look for investors with small funds who are interested in $2 million to $5 million rounds; lobby state and federal politicians to provide competitive policy incentives for biotech to stay in the U.S., and consider relocating outside the U.S. if the previous points won't work for you.
Some of the government economic development groups (EDG) outside North America have been grappling for years with the nasty Darwinian trends that the U.S. sector faces today. The predominance of IPOs in the low double-digit (and even single-digit) millions in the Pacific Rim nations shows the funding pressures those countries face from lack of sufficient "smart money." Some of the EDGs are teaming up to support their local biotech teams in collaborating across the Tasmin Sea and with Taiwan, for example.
Deep Private Pockets?
The idea of getting private foundations involved in funding this hybrid activity was raised by many correspondents, though I have yet to talk directly with any of those foundations to see if they share that interest.
Some, including the Glaucoma Research Foundation and the Kirsch Foundation, are supporting widespread networks of collaborating labs, creating virtual R&D organizations with access to specialized assays and tools, allowing acceleration of the normal pace of academic work.
I heard from some biopharma companies that are incubating projects within their walls, and then spinning them out as companies when warranted. Corporate venture groups have sprung up increasingly in biotech firms. We will explore their activities further.
Service Firms Providing Support:
Several well-established contract research organizations, as well as entrepreneurial startup CROs, identified the funding gap and are trying to fill the need - at least to some extent. Many of those groups are willing to provide preclinical, clinical and sometimes manufacturing services at reduced rates or gratis in exchange for equity.
Several of the groups are planning to raise venture funds of their own to fill the remaining gap. The basic idea is that those folks are well-positioned to identify the most promising candidate programs, based on their experience looking at the characteristics of successful drugs. The services they have to offer are in fact those services most required by early stage programs - medicinal chemistry, assay development, the full gamut of preclinical work aiming to IND filing, and even support of Phase I and IIa trials. Conflict of interest issues must be addressed if the group conducting the trials also is the financial beneficiary of success.
I have been talking with several of these groups, both established and relatively new, and will share what I've found. n
Editor's Note: Cynthia Robbins-Roth's 20-plus years in the biotechnology sector as researcher, consultant and journalist have served her well - her BioWorld Today columns have spawned much intriguing and valuable commentary. We will be posting that feedback on www.bioworld.com, available to subscribers only. If you have comments or relevant experiences you would like to share, or if you want to argue the points raised, please write to firstname.lastname@example.org. Selected letters will be posted. Note that comments are subject to editing for clarity and length. Comments also can be sent directly to Dr. Robbins-Roth at email@example.com. Check the middle column of our website in the next few days for reader responses.